An extremist, not a fanatic

June 30, 2014

How I would defend inequality

For example, Tim Worstall's claim that the tax and benefit system already does a lot of redistribution fails to engage with the argument that pre-tax inequality might be a bad thing.

And Greg Mankiw's claim that the rich deserve their fortune barely counts as an effort. Even if we concede - heroically - that high salaries are due to high marginal productivity, questions remain such as: what about Rawls' claim that talents are arbitrary from a moral point of view? Do people really deserve to have been born at a time when their marginal productivity is high: if Wayne Rooney had been born 80 years ago he'd have earned £20 per week, not £300,000? And even if people do deserve credit for cultivating their own ability, they hardly deserve credit for the fact that others' inability to do so renders their ability scarce. Problems such as these mean that the more intelligent rightists, such as Hayek or Nozick, have acknowledged that the link between merit and income is weak.

So, is it possible to defend inequality better?

The issue here is not one of free markets: it's perfectly possible for a free marketeer to worry about inequality precisely because so much of it arises from market imperfections or state interventions such as bank subsidies, QE, crony capitalism or copyright laws.

Subject to that caveat, here's how I would try to defend inequality:

1. Bosses and bankers have epic levels of narcissism and high pay is the least bad way of gratifying this. If they were paid less, they would seek other ways of satisfying their self-regard such as pursuing non-pecuniary status symbols such as corporate jets or by plundering the firms' assets. There's a reason why the word "efficiency" appears in the phrase "efficiency wage models". It's because it might be efficient to bribe workers not to exploit their power.

Income inequality was low in the 1970s, but industrial relations then were poisonous, productivity low and management poor. There might be a link here.

2. Some policies to curb high salaries would merely shift incomes between the rich. Limiting footballers' pay, for example, would make John Terry worse off but Roman Abramovich better off; ticket prices would stay high because demand outstrips supply. Much the same is true of CEOs were paid less; shareholders would benefit, not customers or workers.

3. One of the best ways to increase equality would be to create countervailing power to the rich - either by strengthening trades unions or by encouraging worker control. But there is no demand for such policies.

4. Even if we accept Wilkinson and Pickett's evidence that inequality has several social costs, it doesn't automatically follow that there's a case for reducing the incomes of the top 1%. They measure inequality by the ratio of the top 20% to bottom 20% of incomes. And it's plausible that it is middling inequalities that hurt us: it's our neighbour's new car or our colleague's pay rise that upsets us from day to day, not footballers' million-pound salaries.

5. The question of whether inequality is bad for growth (pdf) or a cause of economic crises (pdf) is a tricky (pdf) one; much depends upon what causes inequality, and the form that redistribution takes. One big fact, however, warns us not to expect a growth bonanza from ergalitarian policies. It's that long-term economic growth doesn't vary much across countries or time. This suggests that variations in inequality might not have big effects upon growth.

FWIW, I'm not sure about these arguments; I've listed them in rough order of what I think is their plausibility. But I suspect they are better than wibble about desert.

Comments

"What about Rawls' claim that talents are arbitrary from a moral point of view?..."

This strikes me as an example of an unfair line of reasoning that seems to crop up in lots of blogs and columns. You note (correctly) that Mankiw ignores Rawls' claim. But it does not follow from this that Rawls' claim is true. There is plenty of sophisticated criticism of this position. Even if that criticism ultimately fails, by omitting mention of it you yourself commit the same error of which you accuse Mankiw.

If the failure to note possible objections to his position devastates Mankiw's argument, then it devastates yours too. If you think it's OK to omit them in your case (eg on the perfectly reasonable grounds of limited space, or that they are adequately addressed elsewhere), then perhaps you should concede that similar considerations might apply in his case too?

I completely agree with the arguments regarding the arbitrariness of talent and desert of rewards of productivity, but redistribution does not follow from them. Just because the rich don't deserve their gains does not necessarily mean that the poor do.

And even if you were to convince me that it does, there are approximately zero people in the West who are sufficiently poor to be on the receiving end of that redistribution, so the argument is useless in practical terms.

Since the shills for the poor do such a terrible job of defending their claims, let me assist: due to the way evolution works, people don't care at all about absolute levels of wealth, only relative levels (economists call this the Easterlin paradox; evolutionary biologists think economists are silly for thinking it's a paradox). At some point of relative wealth inequality within a society, resentment and jealousy lead to instability with deleterious long term effects for everyone, including the super-rich (sometimes catastrophically so, as when the guillotines come out).

Thus it's in their interests to keep the populace in check through redistribution. It's simple! Pure realpolitik, no silly moralistic arguments needed. The exact implementation of this should of course be designed to minimize distortions.

Ed, not being sarky, can you point me to some of the criticism of the Rawls' view? I'm not saying it doesn't exist, just that I haven't seen it.

I accept, like Rawls, that there's a quasi utilitarian argument that we should tolerate those with bankable talents earning loads (we're all better off if they are encouraged to use those talents). And I accept that equality might only be achievable through unjustifiable interference with peoples's lives and choices - if your talent is a capacity for working long hours, maybe it's unreasonable interference for me to tax away your high income.

But I haven't seen a moral/ethical argument that, say, Usain Bolt *deserves* his rewards for being born with lots of fast twitch muscles. Or Sergei Brin for being clever.

(Personally, I struggle with the very idea of 'deserving' innate talents. 'Being clever' is plausibly an essential part of being Sergei Brin: take away the intelligence, and it's not the same person anymore. If a set of characteristics makes you who you are, then the question of whether you deserve them or not is meaningless: strip them away, and there is no 'you' left to do the deserving.)

Wouldn't this count as criminality among the herd? Is subjecting people to poverty bringing out their narcissistic side?

"Income inequality was low in the 1970s, but industrial relations then were poisonous, productivity low and management poor."

This was a period when the 'neo liberal' project really came into affect, so industrial relations were poor due to increasing inequalities (in hindsight the unions were very prophetic). Also GDP growth, for what it's worth, is no greater in periods of great inequality.

"Some policies to curb high salaries would merely shift incomes between the rich."

Yeah, and some wouldn't.

"One of the best ways to increase equality would be to create countervailing power to the rich - either by strengthening trades unions or by encouraging worker control."

Fair point, the rich will remain rich for as long as they are allowed to. But as soon as they are not allowed to they won't be rich!

"Even if we accept Wilkinson and Pickett's evidence that inequality has several social costs, it doesn't automatically follow that there's a case for reducing the incomes of the top 1%."

How would progress ever be made in any field if we ignored the outcomes?

"The question of whether inequality is bad for growth (pdf) or a cause of economic crises (pdf) is a tricky (pdf) one"

The Human Development Index would suggest the very least you could say is that it doesn't do any harm. Surely a challenge to anyone who apologises for the filthy rich?

It was an integral part of the post-1945 political settlement that inequalities would decline. And the main political parties accepted Kuznets' assumption that declining inequality was a natural part of an advanced economy.

If inequality is in fact rising, that changes the basis of politics. It means particularly that those in the Labour Party who assumed that problems of inequality had been solved by the market need to think again (which maybe why New Labour types are most nervous about the popularity of Piketty's book).

These kinds of debates are annoying as they are conducted at a distance from reality.

If you think human welfare is the aim of moral reasoning and inequality is by assumption bad for welfare all forms of inequality are to be condemned unless a gain can be shown to welfare from any given inequality. Start from assuming total equality and move away only if you can show substantial gains.

Secondly the idea that inheriting the valuable land of the duchy of Cornwall cam have a moral justification is absurd. Land value does not depend on personal effort or ability.

Both copyright and Patents suffer from the problem that demand is variable. Some books or inventions will pay very well but others much less to the author or inventer. In a consumer society the fact your books sell very well provides no absolute proof of the value of the books to society. So some will earn more than is justified and others less.
This element of uncertainty about the utility of monopoly rights is a reason to find a different way to encourage invention.

Considering the cuts to the welfare state in the UK and elsewhere under neoliberal ideology I cannot see how the right can dismiss inequality any more as a moral issue. Large numbers of people are being denied the protection of the safety net
while we are told a fairy story about no one being poor. Ask the people on low pay zero hours and those disabled waiting for assessments about how rich they are.

When we humans lived in a state of nature I doubt equality was much of an issue, the weak got a kicking and the strong feasted well and got the best caves. As our economy and wealth rose there seemed some advantage in being a bit kinder to the by now firmly held down lower orders - some of them were fairly bright and useful. But now times are tougher, there seems little advantage in helping out those at the bottom, indeed it seems a waste of increasingly scarce resources. As Western countries revert to the norm we will find it harder and harder to help along the less well off and indeed harder to maintain the competitive advantage of the middle classes. As for the very rich, our own are well entrenched and the mobile rich are impossible to tax in any meaningful way. More equality was nice for a while but the trend seems away from it now.

My view is that inequality is the inevitable result of capitalism (or private property). As capitalism has been the most successful economic system in terms of promoting human welfare ever devised, for the poor as well as the rich, and no other system eliminated inequality anyway, we should just accept inequality rather than trying to do anything about it. In actual fact it is hard to see why wealth inequality is such a moral problem when such things as sex inequality, depression inequality, health inequality, beauty inequality and age inequality exist. To put it another way I would happily give up all my wealth (such as it is) to be young, handsome, easily amused and with access to lots of sex. Oh and also popular.